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ECB to buy unlimited bonds

By Sheyna Steiner · Bankrate.com
Thursday, September 6, 2012
Posted: 12 pm ET

The European Central Bank announced Thursday that it will purchase sovereign bonds from struggling eurozone countries through a new program called Outright Monetary Transactions.

No limits have been set on the size of the bond purchases, or, in the exact words of the central bank's news release, "no ex-ante quantitative limits are set on the size of Outright Monetary Transactions."

Unlike with the previous debt-buying program, the European Central Bank, or ECB, will be on the same level as private investors. The ECB took senior status in purchasing Greek debt while private investors in Greek bonds were forced to take losses when the country's debt was restructured earlier in 2012.

As indicated at the August meeting, the bond purchases will focus on the short end of the yield curve, focusing on issues with maturities between one and three years.

In order to receive aid from the central bank, struggling countries such as Spain and Italy will need to formally request help through the European Financial Stability Facility or the European Stability Mechanism. The aid does come with strings attached in the form of strict austerity measures, which have made countries reluctant to request help from the bailout fund.

Receiving debt help from the ECB will be conditional on adherence to the economic requirements.

From the ECB news release (with British spelling intact):

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

The president of the European Central Bank, Mario Draghi, also announced that the bond purchases would be sterilized. In other words, for each purchase made by the central bank, other assets would be sold in order to avoid expanding the central bank's balance sheet and increasing the money supply.

The sterilization program may resemble that of the previous program in which the ECB borrowed money from banks in order to make the purchases. As Reuters reported on the sterilization program in 2010:

The ECB said it will start offsetting the purchases from Tuesday by taking one-week deposits from banks. It will offer an interest rate of up to 1 percent on any funds banks deposit, well above the 0.25 percent it offers on daily deposits. ...

As part of the new sterilization plan the ECB said it will allow banks to use the weekly deposits as collateral in its lending operations, a move that effectively gives them the option to reborrow the money again.

"With one hand you give and with the other you take, it's not possible (to sterilize) ... the result is still that the liquidity is there." said ING analyst Carsten Brzeski.

In his remarks before today's press conference, Draghi reiterated that that the "euro is irreversible," and said that the central bank acts "independently in determining monetary policy."

Follow me on Twitter @SheynaSteiner.

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